The Future


The Future

WeWork is everything wrong with capitalism today

Adam Neumann's exit is just the beginning of bad times ahead.

So WeWork’s Adam Neumann is gone. The floppy-haired Israeli who spun co-working spaces into a venture capitalist fever dream of seemingly endless growth and bottomless losses has been forced out as CEO. He is being replaced, for now, by two of his deputies, reports the New York Times. After years of eyebrow-raising behavior (e.g. buying a private jet, splurging on celebrity appearances at corporate events, rebranding WeWork as a “platform” for raising mankind’s “consciousness”), what ultimately did Neumann in was bungling the company’s multi-billion-dollar IPO. Investors who once valued WeWork at $47 billion will now have to settle for a valuation at about a fifth of that. If the disappearing act of Uber’s Travis Kalanick, perhaps the ur-bad boy tech CEO of the 2010s, is any indication, we likely won’t be hearing much from Neumann anytime soon.

But even if Neumann is out of the picture for good, the carnage left in his wake is just beginning. WeWork is no longer going to push for an IPO by the end of the year — a new date has not yet been set — and it will likely be “axing a few thousand of its more than 12,000 employees,” according to the Wall Street Journal. Economic analysts are pointing out that WeWork’s lease agreements with its landlords have a real house-of-cards quality, and that the recession believed to be coming next year could spell disaster for some commercial real estate markets — with WeWork stuck right in the middle of it. The WeWork empire, for all that it was worth on paper, appears to have been built on sand. Screwing up the IPO seems to have just hastened the inevitable.

Boston Federal Reserve chief Eric Rosengren, in an unusually specific speech delivered last week, noted that co-working companies like WeWork often create special legal entities to lease their space, “in order to shield themselves in case of bankruptcy.” This gets them off the hook for their payments to landlords should things go south. Landlords, meanwhile, enter into these agreements because interest rates have been so low since the Great Recession that they’re quick to accept this risk, commanding higher rents from WeWork-like tenants and allowing them to “squeeze more yield out of their assets.” If WeWork goes belly-up, or attempts to wriggle out of its lease agreements, what happens to its landlords and their investors?

In the years since WeWork’s founding in 2010, this model has worked out pretty well for everyone. WeWork’s investors have cheerfully covered the company’s mounting losses, assisting commercial real estate firms with keeping their lease prices increasing even as the total volume of leases given out by these firms fell. Though WeWork represents a small fraction of commercial leases, its presence is felt biggest in major cities like Manhattan (in 2018, WeWork became the largest private tenant on the island), where one real-estate investor has found that in the last two years, WeWork made the difference between a growth of 2.3 million square feet in total leased office space and a loss of 700,00 square feet. But with the rug pulled out from under WeWork’s IPO, and with the consensus view forming that a recession is around the corner, as one survey respondent told the National Association of Realtors this past March, it “feels like we are at the top with correction imminent.”

The rickety dynamics if not the extreme degree of this story should feel familiar. This past May, Uber managed to go public and promptly face-planted in its first six-and-a-half hours of trading; by the end of the day, writes the New York Times’ Mike Isaac in Super Pumped, his recent book on the company, “Uber had lost more in dollar terms than any other American initial public offering on Wall Street since 1975.” Once Uber had emerged from the protection of the private investment market, public investors immediately dinged the ride-hailing business for losing a ton of money with no end in sight; earlier this month, Uber announced that it would be laying off more than 400 people, or about eight percent of its staff.

The ostensible grown-ups in the room were able to somewhat rectify the situation at Uber almost two years before its IPO by firing Travis Kalanick. At WeWork, there was no such attempt at discipline. Masa Son, the Japanese tech magnate who has been cutting billion-dollar checks to tech firms through his company SoftBank’s so-called “Vision Fund,” doubled down on Neumann as recently as January with an additional $2 billion investment, on top of the more than $8 billion he had already plowed into the company. In fact, according toTimes columnist Andrew Ross Sorkin, WeWork’s bankers at JPMorgan, UBS, and Credit Suisse gave Neuman a personal $500 million line of credit as part of their campaign to make sure that they were given the lucrative job of underwriting the company’s eventual IPO, which they insisted to Neuman could be worth $60 billion or $90 billion if they handled it right. Now it’s uncertain if they’ll get WeWork to $5 billion on the stock market, if they’re even able to make an IPO happen at all.

The greed that enabled all this is astonishing. WeWork’s investors and bankers, desperate for an IPO that would reward them richly, co-signed Neumann’s personal self-dealing and a transparently flimsy business model. There’s a particular irony to Wall Street’s involvement; the past decade of low-interest rates that have pushed investors to fund extremely risky entities like WeWork was brought on by those same banks’ insane bets on the housing market that triggered the Great Recession. The story of WeWork and Adam Neumann is the same story of capitalist overreach that has defined American society for the last generation. However it ends, we can know with certainty that it will “mean” one thing for a large number of people: misery.

Noah Kulwin is the Future Editor of The Outline.